You are here

Stricter Guidelines for Reverse Mortgages Could Prove Most Helpful in the Long Run

FHA has just implemented tighter rules for reverse mortgages. Sometimes stricter rules and guidelines have a bright side...maybe more protections from fraud for those seeking a reverse mortgage.

On April 27, a series of “financial assessment” tests were adopted, tightening up the guidelines for attaining a reverse mortgage. This will make applying for a reverse mortgage much more like the process used in a standard mortgage…applicants will have go through a stiffer underwriting process.

But they already own the house, and have a large amount of equity, so why do they need to qualify? In the past, there were no credit history checks or income checks. What many people don’t realize is that reverse mortgages have had a poor track record over the last few years, with a large number of borrowers defaulting on their property taxes and insurance premiums. The taxpayers ended up footing the bill.

The new rules from FHA will require a credit history, a review of the borrower’s debts, their payment history regarding taxes, Homeowner Association fees, and insurance payments, and income from employment, social security, retirement accounts and investments. Many believe the new rules will make it tougher for people to obtain a reverse mortgage.

Tougher Rules Have A Bright Side

But one of the upsides, besides protecting the public from another foreclosure wave, maybe there will be fewer shenanigans involving reverse mortgages. Another reason they have won such a bad rap in the last few years is because they have been very confusing, and many people who got a reverse mortgage really didn’t understand them, or were misled, ending in a lot of fraud. Reverse mortgage scams were rampant in recent years, primarily because perpetrators of these schemes were deliberately deceiving and misleading seniors. With tighter standards, perhaps there will also be more protections for those who obtain a reverse mortgage.

Whether a homeowner wants to stay in their house or do a reverse-with-purchase and buy a smaller house, reverse mortgages can be a great tool. I’m a big fan for those in the right circumstances. For homeowners with enough equity, they can receive payments from the bank and still live in their home for the remainder of their lives, as long as they keep up with the insurance and the property taxes. It makes a lot of sense.